The Bank of Canada raises the key lending rate today. The rate went up from .50% to .75% this increase is the first in the last seven years and it marks a change that will be coming to the Canadian lending market.
The key lending rate or the Overnight rate is what financial institutions make day to day loans to each other. This upwards change can have negative effects on consumers that hold Variable rate mortgages as well as Lines of credit.
Typically the banks charge a premium above the overnight rate currently 2% for most financial institutions. In some cases, banks have been charging 2.2% above. The historical premium that the banks charged consumers above the overnight rate was 1%. Today’s changes can impact the prime rate that the banks use but it could also mean that the banks will start to cut back on the premium they have been charging consumers.
As consumers of mortgage products, it is important to understand the fundamental differences between fixed and variable rates. Many clients have contacted me in the last week with the news of the change wondering what will happen when the rates go up. My advice is now and always has been, treat a mortgage with a more holistic approach rather than focus solely on interest rates. Interest rate fluctuations are normal and consumers need to prepare themselves for eventual increases in the rates over the years to come. We have been sold a lie by big banks that rate is all that counts but proper planning is key to owning a home and securing a mortgage.
Stephen Poloz & Senior Deputy Governor Carolyn Wilkins will be holding a media conference today to discuss the decision. Today’s announcement came with the latest Monetary Policy Report you can download a copy here
As always, I am available for comment or questions.